ONGC: Rising subsidy is like a millstone around the neck

ONGC, India's biggest profitmaking listed company, has reported a 32% slippage in profits for the quarter to September as revenues dropped, costs rose and margins shrank, mainly due to a spurt in its subsidy burden.

Moreover, there is no assurance that the state-run company's subsidy woes will end anytime soon, making the stock unattractive to investors. Under the government's directive, ONGC had to extend Rs 12,330 crore of discounts to the three public sector oil marketing companies, more than twice the burden in the year-ago period. This led to a 12.4% drop in the company's net revenues to Rs 19,885 crore.

As a result of the heavy discounts extended, the company's net realisation from selling each barrel of crude oil dropped 43.4% from the year-ago level to $46.8 a barrel. Its oil production also continued to fall, resulting in an output of 5.1 million tonne during the quarter, down 8.2% compared with July-September 2011. At the same time, the company's costs increased due to a 20% jump in statutory levies, by far the biggest cost component for the company.

A 42% jump in exploration costs and a 66% jump in staff costs made the matters worse. The company's chairman and managing director, Sudhir Vasudeva, mentioned in a post-results press conference that the company's entire cash reserves could get wiped out "within no time" if the heavy discounts were to continue. The company is working on several high capex projects.

ONGC's performance has been stagnating not only due to its ever fluctuating subsidy burden but also because of a steady decline in output from its ageing oil wells. It has failed to make up for this by the timely commissioning of new fields. The company announced a few discoveries during the quarter, as has been its custom for the past several years.

However, it is not clear as to when these discoveries would translate into incremental production. The company had announced in the recent past that some of its new fields would commence production in the 2013-2015 period, which could address to an extent the concerns over its dwindling output. Nonetheless, the company's valuation is unlikely to improve in the near term until the ad hoc nature of subsidy sharing is done away with.